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AP Micro/Macro > AP Macro Test > Flashcards

AP Macro Test Flashcards

0
Q

Why do we only include ‘final’ goods and services?

A

To prevent double counting

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1
Q

What is GDP and how is it calculated?

A

The total value of all final goods and services produced in a year within a country

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2
Q

Are financial transactions included in GDP?

A

No.

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3
Q

Why is GDP an imperfect measure of societal well-being?

A

It ignores income distribution and doesn’t factor out spending on disaster relief and epidemic costs

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4
Q

What is national income?

A

The sum of income earned by the factors of production owned by the citizens. Includes wages from labor, rent for land, and interest for money

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5
Q

Expenditure approach for calculating GDP

A

GDP = C + I + G + (X - M)

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6
Q

Personal income

A

Income received by households before personal taxes

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7
Q

Perform the income approach for calculating GDP.

A

National Income + Depreciation - Subsidy Payments + Net Income of Foreigners

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8
Q

Why is depreciation added to national income?

A

Depreciation expenses are subtracted from corporate profits before NI calculation, so they need to be re-added to reflect the value of the output needed to replace or repair worn out capital.

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9
Q

How is “net income of foreigners” calculated?

A

Income of foreigners working here - Income of native citizens working abroad

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10
Q

Why must we add the net income of foreign workers to NI?

A

NI includes the income of all citizens everywhere. Therefore, to calculate GDP, which includes the value of all goods produced domestically, we need to subtract the production of goods by domestic people that is made abroad.

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11
Q

GDP includes the value of goods produced _______ by _______

A

domestically, anyone

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12
Q

Money Illusion

A

When nominal salary goes up (but not real salary), which tricks consumers into excessive spending

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13
Q

How are menu costs a consequence of inflation?

A

Higher prices force businesses to print/publish new prices

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14
Q

Those who borrowed money at fixed rates pay back amounts that are worth _______ in real terms due to inflation

A

less

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15
Q

How is CPI calculated?

A

(cost of base year market basket at current prices / Cost of base year market basket at base year prices) x 100

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16
Q

Calculate inflation between years

A

[(CPI in year z/CPI in year Y)-1] * 100

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17
Q

The PPI is useful for ______

A

predicting future inflation, since companies pass costs onto the consumers

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18
Q

GDP Product Deflater is the same as the PPI, except it uses the __________

A

current year market basket

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19
Q

Frictional unemployment

A

People who are between jobs

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20
Q

Structural unemployment

A

A mismatch of skills, or people that are unemployed by the structure of laws and policies

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21
Q

Labor force participationo rate

A

Number of people in the labor force divided by the working age population

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22
Q

Cyclical unemployment

A

Results from downturns in the business cycle

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23
Q

Seasonal unemployment

A

Results from the time of year

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24
Q

Dishonest workers

A

Claim to be unemployed to get unemployment benefits

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25
Q

Discouraged workers

A

Willing and able to work, but become so frustrated in the job search that they stop trying. They might be a reason that the unemployment rate is understated

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26
Q

Natural rate of unemployment in the US

A

about 5%

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27
Q

Which part of the AS curve is Keynesian, which one is intermediate, and which one is classical?

A

Classical on top (stays at physical limit), intermediate in the middle (duh), Keynesian or Depression stage (no change in price level)

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28
Q

Why is the LRAS a straight line?

A

The fact that wages, salaries, and input prices will adjust eventually to the price of the final good. (Price of final good goes up, price of factors of production will go up too as demand for them go up.) Therefore, price is not really a determining factor for output.

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29
Q

LRAS is at the level that corresponds with __________

A

full employment

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30
Q

Say’s Law

A

Supply creates its own demand

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31
Q

3 reasons why AD has a negative slope:

A

Real Wealth Effect, Foreign Trade Effect, Interest Rate Effect

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32
Q

The Real Wealth Effect

A

When price level increases, value of assets such as cash and checking-account balances fall. Therefore, real purchasing power falls and people will buy less at higher price levels.

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33
Q

Foreign trade effect

A

When price level in one country increases, prices of imports become less expensive and exports from that country become more expensive. Therefore, more imported goods and less exports.

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34
Q

The interest rate effect

A

When price level increases, the real quantity of money decreases. Therefore, people need more loans to continue current consumption levels, which increases demand for money and decreases supply of loanable funds. Therefore, interest rate must increase, which leads to a decrease in RGDP as households and firms put off major purchases.

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35
Q

Stagflation

A

Combination of rising prices and falling output (decreases in AS)

36
Q

Demand-pull inflation

A

When AD curve shifts out to the right causing inflation

37
Q

Cost-push inflation

A

When AS pushes to the left and causes inflation

38
Q

Creeping inflation

A

Low inflation rates for a long period

39
Q

Galloping inflation

A

Inflation > 10% per year and grows month after month

40
Q

Hyperinflation

A

Price increases > 50% per year

41
Q

Recessionary gap

A

When the equilibrium GDP level is below full employment

42
Q

Inflationary gap

A

When equilibrium RGDP is greater than full employment RGDP

43
Q

Full capacity

A

Every resource is being used. 0% unemployment.

44
Q

Law of One Price

A

States that every good should have the same price in different countries due to continued arbitrage

45
Q

Purchasing Power Parity

A

One currency will have the same purchasing power when converted to another currency

46
Q

Since not all goods can be transported from one location to another, neither the _________ or ________ always holds

A

purchasing power parity, law of one price

47
Q

Why does supply drift towards full employment?

A

When there is a lot of unemployment, it is cheaper for firms to hire workers than it is when there is full employment.

48
Q

Average growth of RGDP in the US per year

A

3%

49
Q

How do we get the equation I = S + (T-G)

A

Financial intermediaries only have 1 outflow and 2 inflows.

I = S + (T-G)

50
Q

Explain the effects in order of expansionary fiscal policy on an open economy.

A

Government spending increases/taxes decrease -> Higher interest rates as government needs to borrow more -> Interest demand for domestic currency increases -> Appreciation of domestic currency -> Exports decrease and imports increase -> Net exports decrease

51
Q

Explain the effects of contractionary fiscal policy on an open economy.

A

Government spending decreases/ taxes increase -> Lower interest rates (government demands less) -> Decreased demand for domestic currency for investment purposes -> depreciation of the domestic currency -> exports increase and imports decrease -> Net exports increase, partially offsetting contractionary policy

52
Q

Crowding out

A

When the government crowds out private investment when it requires more money to perform expansionary fiscal policy

53
Q

Primary functions of money

A

Medium of exchange, store of value, and unit of account

54
Q

Medium of exchange

A

Provides a common platform for people to exchange things (prevents barter)

55
Q

Double coincidence of wants

A

When the person you want to barter with likes something that you have by chance

56
Q

Fiat money

A

Money that has no intrinsic money

57
Q

Commodity money

A

Has value and is based on something that has real value

58
Q

Store of Value

A

Money doesn’t erode and keeps value well, as opposed to a cow, which will die.

59
Q

Unit of account

A

Money provides a standard unit for price listings so you can easily compare

60
Q

M1

A

Sum of coin and paper money plus checking deposits and traveler’s checks

61
Q

M2

A

M1 + Savings deposits, small time deposits, money market mutual funds, Eurodollar deposits

62
Q

Money multiplier =

A

1 / required reserve ratio

63
Q

Tools of the Fed to control money supply

A

Adjustments in required reserve ratio, adjustments in discount rate paid by banks to borrow from the Fed, and OMOs

64
Q

List all the ways Fed can do contractionary monetary policy.

A

Increase required reserve ratio, increase discount rate, sell bonds

65
Q

List all types of expansionary monetary policy the Fed could do

A

Sell bonds, decrease RRR, decrease discount rate

66
Q

When investment in capital resources goes down in the current period, future output is ____________

A

sacrificed because there is less capital for use in production

67
Q

Liquidity Trap

A

When money demand curve is flat and movements in money supply do not impact interest rates at all

68
Q

Keynesians also believe that the investment demand curve is _______, making it unresponsive to changes in the interest rate

A

inelastic

69
Q

Keynesians favor ______ policy

A

fiscal

70
Q

Equation of exchange

A

MV = PQ (M is money supply, V is velocity of money, P is average price, Q is quantity of goods and services sold in a period)

71
Q

Velocity of money

A

The number of times per year that the average dollar is spent on final goods and services

72
Q

Monetarists believe that the economy is inherently _____ and favor a _______

A

stable, steady increase in money supply proportional to the increase in RGDP

74
Q

Natural rate of real interest is supported by _______

A

monetarists

75
Q

Explain the Fisher effect.

A

If people are able to predict a tightening of the money supply that is intended to increase interest rates (thereby making consumption fall), they will stop investment immediately and interest rates might actually fall.

76
Q

Money neutrality

A

When changes to the money supply do not result in changes in real variables in the long run

77
Q

Explain the Fisher effect and why it works.

A

1.) Money neutrality - changes in the money supply in the long run do not change real variables. 2.) When the Fed enacts monetary policy, it results in new expected rates of inflation. (contractionary monetary policy is supposed to result in less inflation) 3.) These changes in the expected interest rate causes drops in the nominal interest rate (change in expected interest rate = change in interest rate). 4.) There is no effect on anything.

78
Q

Budget deficit

A

G-T in one year

79
Q

National debt

A

Accumulation of past deficits

80
Q

Ricardian Equivalence theory

A

Deficit financing is no different from tax financing because if former is chosen. This is because when the government borrows (i.e., issues a bond), it will eventually have to pay that bond off at an interest rate.

81
Q

A Phillips curve has ____ on the y-axis and ___ on the x-axis

A

Inflation rate (percent), unemployment rate (percent)

82
Q

Movements in ____ move along the Phillips curve

A

AD

83
Q

Supply shocks result in _______ movements of the whole Phillips curve

A

rightward (means more unemployment at every rate of inflation)

84
Q

Merchandise trade balance

A

Exported goods - imported goods

85
Q

Current account

A

trade balance + services balances + income on assets from abroad - payments on assets to people abroad

86
Q

Capital account

A

Foreign purchases of home assets (stock, financial assets, or physical capital) - domestic purchases of foreign assets

87
Q

Balance of payments always equals __

A

0

88
Q

Quantity theory of money

A

Velocity of money is stable and so is Quantity of goods and services. Therefore, when M increases, only P will increase as well. Therefore, monetary policy has no effect other than price level increases.

AP Micro/Macro (1 decks)

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